Significant Charity Lease Accounting Changes are Coming

Which charities are affected?

The lease accounting changes apply to charities preparing accruals accounts. They must follow the Charities SORP (Statement of Recommended Practice) accounting rules.

Accruals accounts must be prepared if the charity’s income is over £500,000. Some charities whose income is under £500,000 choose to follow the SORP voluntarily and they are also affected.

When is the change happening?

The new rules will take effect for periods starting on or after 1^st January 2026. For example, for the year ended 31^st December 2026 and the year ended 31^st March 2027.

What is changing?

The change is to how charity leases are presented in the accounts.

Leases affected:

• Property leases
• Vehicle and equipment leases, (although leases of less than a year or leases of low value items are not affected).

Up until now charity lease rental costs have been presented in a simple way; showing rent as an expense in the accounting period on the basis of the monthly or quarterly rent charges incurred in accordance with the terms of the lease agreement.

This was straightforward and easy to understand.

However no liability was shown in the accounts for the future rents that a charity is liable for. This is something the new rules sought to address.

What are the new rules?

The new rules are based on considering the entire rental liability that the charity is liable for. In practice this includes all rental charges for the term of the lease, or until the next break clause.

For example, if a charity has a 10 year property lease with rental charges of £10,000 per year, the charity would have a total liability of £100,000.

A further complication of the new rules is that this total £100,000 liability is then discounted to get to a lower “present value” which is then shown as a liability on the balance sheet in the accounts.

As this large liability would reduce the charity’s assets in the accounts if brought in on its own, a new asset concept has been created called a “Right of use asset”. This is the notional value that using the property or equipment brings to the charity. It is set initially at the same value as the discounted total rent liability.

What are the effects of the change?

For charities with leases the changes will bring an extra asset and liability onto the charity’s balance sheet. If property leases are involved the extra assets and liabilities could be quite large.

The effects may include the following:

• A charity may move from an independent examination requirement to a statutory audit requirement because the audit threshold rules include assets in their criteria.
• If a charity has a loan, loan covenants are affected.
• A charity’s reserves policy may need to be reviewed.
• The changes will require more internal or external accounting resources to consider the nature of the leases held and calculate how they should be accounted for.

Can this be avoided?

If your charity is required to prepare accruals accounts, these changes cannot be avoided.

However, if the charity’s income is below £500,000 then “receipts and payments accounts” can be prepared which do not have to follow the Charity SORP and are not affected by the lease changes.

We anticipate that many charities will be considering changing to receipts and payments accounts as the rules are far less onerous.

How we can help

At Perrys we have extensive experience of preparing charity accounts and carrying out independent examinations and audits.

If you are involved with a charity that is affected by the new lease accounting rules, we can help. Contact your local Perrys branch today.